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This FTSE 250 stock is up almost 50% in a month. Here’s what I’d do next

Everybody loves a good turnaround story and I’ve got a couple of juicy ones for you here. The first is online fashion and beauty retailer ASOS (LSE: ASC), which had disappointed investors who hoped it would blaze a similar trail to Boohoo Group.

ASOS

Instead, the FTSE 250 group’s share price fell faster than a catwalk model in super-high platforms, after it issued two shock profit warnings last year, in July and December. In April this year, its interims showed a drop of 87% in pre-tax profits to £4m, despite a 14% rise in half yearly sales to £1.3bn.

Warehouse IT issues, active customer growth slowing and a failure of price cuts to boost sales sufficiently all played their part. ASOS has also struggled with customers buying clothes to flaunt on Instagram, then returning them for a refund (yes, some people are that sad). 

However, the ASOS share price rocketed 30% in a single day after October’s finals showed a 13% rise in retail sales to £2.66bn, spearheaded by 15% growth in the UK. Sales also grew strongly in the EU, US and rest of the world. 

Profits before tax jumped by a third to £33.1m, despite substantial transition and restructuring costs”, while total orders placed rose 14% to 72.3m. ASOS is up nearly 50% in the last month.

CEO Nick Beighton reckons he has “identified the root causes of our operational issues”, and says with 60% of revenues coming from international customers, its strong global logistics platform should take advantage of the growing online fashion market. All of which might convince me if it wasn’t for the fact it trades at 122 times forward earnings.

To be fair, those earnings are predicted to jump 83% in the year to 31 August 2020. That should halve the P/E to around 64.8, although I wouldn’t call that exactly cheap. I’d struggle to recommend it at that price.

N Brown Group

In August last year, I checked out another FTSE 250 digital fashion retailer, Manchester-based N Brown Group (LSE: BWNG), after its share price had dropped 56%. I suggested it might just be a tempting gamble for income seekers, because unlike ASOS and Boohoo, N Brown actually pays a dividend.

The payout is generous too, with a forecast yield of 6.1%, covered three times by earnings. Today, it is generating profits rather than losses, with recent interims showing a pre-tax profit of £18.8m, compared to a loss of £27.1m the year before.

Management pinned the 5.4% drop in revenue to £432.9m on the managed decline of the legacy offline business, and the decision to close the group’s final 20 stores. Net debt increased 14.5% to £481.6m, which is higher than its £354m market cap.

N Brown is a specialist player, targeting giant-sized niches such as women over 50, the plus-size market and ‘big and tall’ men, in contrast to youth-focused online fashion rivals. Its brands Simply Be, JD Williams and Jacamo should theoretically enjoy greater customer loyalty if they get it right.

I’m still going to pass, though. N Brown’s high dividend does not fully compensate for its high valuation and high debt. A key reason for debt is that its financial services arm allows customers to buy on credit, but impairments could rise if the economy continues to slow.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.